When looking at the general health of the housing market, there are two important numbers to consider. First, what are homes selling for – are prices going up or going down? Second, what is the sheer number of homes being sold? In this week’s column, we’ll look at the latter. If the total number of homes being sold begins to show signs of growth, that can be a precursor to improving home prices and an overall strengthening in the housing market.

Before we get into the graph, and what it may mean, we should have a little math tutorial. A math lesson is probably the best way to make most people stop reading this column and move on to their horoscope, or the funny pages, but hang with us for a bit. What this graph shows is the number of homes that go under contract (blue line) and the number that actually go to settlement (red line) on a 12 month rolling basis. Now for the math part. By 12 month rolling, we mean the total number for a specific 12 month period. This graph starts with the 12 months ending December ‘07, then the 12 months ending January ‘08, February ‘08 and so on. By using 12 month rolling, we eliminate any seasonality in home sales, and the graph more clearly shows you a general trend line.

So, what does the graph tell us? First, let’s look at the blue line, which is the number of homes under contract, or what is sometimes called pending sales. Pending sales are higher than homes sold (the red line), because not all homes that get a contract end up going to settlement. There can be a whole variety of reasons a contract may fall apart. For example, someone might not get their financing approved, or home inspection issues could cause it to unravel. Regardless, the pending home sales line appears to have turned the corner in March ‘09, and there’s continued growth through the end of last month. That’s encouraging, since an increase in pending sales can be a leading indicator, suggesting future growth in the number of homes sold.

Interestingly, the spread between pending home sales (blue line) and homes sold (red line) has remained fairly constant, until the economy blew up in September ‘08. At that time, the spread began to widen, and in the last three or four months, there has been an acceleration in the spread. This would indicate that more contracts are coming apart, before people can get to the settlement table. Our own anecdotal experience would confirm what the graph shows. In real estate agent terminology, a pending sale that doesn’t get to settlement is called a fall-thru.

Banks are constantly changing and generally increasing the requirements necessary to get a loan. Plus, these days there’s a greater chance that someone could lose their job. This, along with an overall heightened level of consumer stress, can contribute to the chances a contract will encounter problems and end up as a fall-thru. Additionally, the period of time between when you get a signed contract and when you actually go to settlement is longer than it used to be. When houses were selling like hotcakes, there might only have been a couple of weeks or a month at the most between a signed contract and settlement. Now, primarily because of the difficulty in getting financing approved, the time from contract to settlement could be a couple of months. For a short sale or a foreclosure, this time could easily expand to six months or more. As a result, the spread between pending sales and homes sold may continue to widen. And, there could also be more of a lag time between changes in pending sales and when we see them reflected in actual homes sold.

When you look at the red line (total number of homes sold), it’s been a long and steep downward slide. In 2007, there were a total of 6,182 homes sold in Anne Arundel County. For the 12-month period ending last month, there were only 4,181 homes sold – a decrease of over 32%. Nevertheless, there might finally be some good news in that red line. As of April 2009, it appears to have hit bottom. Unlike pending home sales, we haven’t yet seen it turn the corner and start going up. But if we can stop the bleeding, that will be the first step in curing the patient. As we said, pending home sales tend to be a leading indicator. Consequently, we would be surprised if that red line doesn’t begin to go up a bit over the next couple of months. The only fly in the ointment could be a continued problem with fall-thrus. Agents are out there showing houses and writing contracts, but if the credit markets don’t pony up the money, that red line could stay flat for a while. However, real estate agents are eternal optimists. We choose to believe that better times could be just down the road.

This week, we took a look at the number of homes being sold. Next week, we’ll examine housing prices -where they’ve been, where they might be going and how they relate to the laws of economics. When you have falling prices, it usually means that supply exceeds demand. That’s what we learned in Econ101. But, in this age of tremendous government intervention and control, the laws of economics don’t always apply. Next week, we’ll show you the numbers and take a stab at where it might all be going, with respect to prices.